I don’t at all buy the theory that Fannie Mae and Freddie Mac were important causes of the financial bubble (note that very similar property boom/bust cycles played out in Ireland, Spain, etc. in the absence of our particular housing market institutions) but the problem with Fannie and Freddie was always their large potential cost to taxpayers in the event of a crisis and that potential is now being realized.
This is actually one of the things that strikes me as weird about the centrality of TARP and the TARP vote in the post-crisis political climate. If you look at the fiscal cost of TARP compared to the cost of the Fannie & Freddie takeover, it’s quite small. But the legislative measure authorizing the Fannie/Freddie nationalization, the Housing and Economic Recovery Act of 2008, was passed by a bipartisan congressional vote and signed by George W Bush with very little controversy back in July of 2008. As it happens, I think it’s a good thing that politicians who voted for HERA haven’t got in TARP-style hot water over it since HERA was about the best one could make of a bad situation, but the tendency to overlook this measure while harping on about TARP doesn’t make any real logical sense.
As we move forward with ideas for reform of these institutions, I hope one thing we’ll do is step back wider and ask how much sense it really makes for the government to be specifically encouraging homeownership. In the aggregate, America’s housing stock is extraordinarily abundant and high-quality compared to every other country I’m familiar with. There’s obviously a targeted issue of whether poor people will be able to afford decent accommodations, and over time the country will clearly get back in the business of building houses as the population grows. But it doesn’t seem at all desirable to me for public policy to specifically encourage capital to flow into the residential housing sector. And the idea that middle class families should basically live inside their lifesavings seems perverse. The good idea at the heart of mortgage securitization is that it doesn’t make sense for a bank to make a geographically undiversified investment in housing. But of course that’s exactly what a household is doing when it buys its home.